Cheap Domestic Energy Sources Drive Manufacturing Renaissance

HOUSTON, May 13, 2013 /PRNewswire-iReach/ -- The U.S. manufacturing industry is competitive again and is driving global capital investors to the Gulf Coast thanks to cheap domestic natural gas, according to the M&A INSIGHT 2013 keynote speaker Jesse Thompson, business economist at the Federal Reserve Bank of Dallas – Houston Branch.

M&A INSIGHT 2013, held May 2 at the Houston branch of the Federal Reserve Bank, also featured Tim Moore, managing shareholder at Doeren Mayhew, David Magdol, chief investment officer at Main Street Capital, Bill Nelson, partner at Haynes and Boone and Steve Scheinthal, executive vice president and general counsel at Landry's. Panelists discussed the current M&A climate and other topics such as buyer multiples and debt markets, alternatives to selling 100 percent of a business and how to maximize value through planning and preparation.

2013 Economic Outlook

"Manufacturing, especially chemical manufacturing, which has been in decline for over a decade, registered growth in first quarter of 2013," Thompson said. "Cheap domestic natural gas provides cheap electricity and cheap raw materials for the petrochemical industry, attracting capital investment from overseas companies to the Gulf Coast."

The U.S. manufacturing industry is becoming globally competitive again, and exports are on an upward trend in part because of the boom in shale gas exploration.

"Organic chemicals are currently the number one contributor to growth in net exports in the Gulf Coast," Thompson continued. "With the increased trade activity resulting in an increased number of jobs related to trading. Houston is the number one U.S. port for foreign tonnage, ranks fourth in the country in international trade-related jobs, and its overall job growth is expected to continue at 2.5 percent to 3.5 percent in 2013."

Thompson said uncertainty persists due to regulatory issues, in particular fiscal policy and implications of the Affordable Care Act. Moreover, a slowing global economy sends mixed signals whether global trading accelerates or not. In particular, the emerging economies, such as China, registering lower-than-predicted results can negatively impact the energy trade.

2013 M&A Activity Outlook

Panelists agreed the number of transactions in the Houston area is on the rise and M&A activity will be robust in 2013. "An emerging trend we see is more buyers approaching business owners," Tim Moore said. "Sellers were highly motivated to exit at the end of 2012 due to the tax implications, but now buyers are driving the activity."

Sellers are experiencing strong earnings and want to transact at the right time – as always, the challenge is to agree on price, Moore said.

"The time to sell is when the market is on an upward trend," David Magdol added. "Business owners should consider liquefying their assets when they can show solid past performance and the economy is predicted to continue doing well."

The current lending environment also contributes to the increased number of deals, with a significant amount of private equity capital available and borrowing rates hitting an all-time low, Steve Scheinthal said. "The ability to finance transactions is what drives the activity," he said. "Combined with lower inventory of assets available for purchase, buyers are now willing to pay more."

Gaps in valuation are becoming more common, and panelists agreed earnouts are one way to bridge the price difference between buyer and seller. "Earnouts carry a lot of risk and require setting up performance metrics and other considerations," Bill Nelson said. "This strategy can work well in situations where the target company has been in business for a limited period of time but has potential for significant growth, such as services and technology sectors."

Moore recommended conducting a private limited-auction process as a tactic for maximizing seller value. "The benefit is to find out what the market truly believes the value of the business is," he said. "And having multiple buyers is critical to the negotiation process."

Another trend in 2013 is a renewed interest in minority transactions. "The most recent minority transactions result from the strategic buyers trying to get access to assets where gaps in price are too big," Moore said. "Through the initial minority transaction, buyers hope to get access and be able to gain control over the entire company once the owner is ready to exit completely."

Most important, panelists advised entrepreneurs to plan an exit strategy, regardless of the situation in the market. Business owners should be prepared and start putting value drivers in place now, so they are ready to transact when a good opportunity arises.

About Doeren Mayhew

Founded in 1932, Doeren Mayhew is a leading group of CPAs and trusted advisors who go beyond traditional accounting to help mid-sized businesses grow and prosper. The firm's Houston investment bankers serve industries such as manufacturing, construction, non-profit, energy, financial institutions, service, retail/restaurant and wholesale/distribution with a full range of accounting, audit, tax, merger and acquisition, and business advisory services. Combining a deeply rooted history with a progressive mindset, the firm offers insight into the business, oversight to ensure best practices and foresight for what's ahead. Securities offered through Decosimo Corporate Finance, LLC, member FINRA and SIPC. Please visit www.doeren.com for more information.